New Maryland bill could shorten debt collection after foreclosure


Jose Faustino Rodas Mendez with his son Daniel at his new apartment in Mount Rainier, Md. He thought he had gotten a 30-year fixed mortgage on the two-bedroom College Park home he bought in 2006. But the payments eventually shot up to $3,000. (Michel du Cille/The Washington Post)

Maryland legislators will consider a bill that would reduce the time from years to days that debt collectors have to take homeowners to court for the leftover debt on their foreclosed homes.

The Maryland Consumer Rights Coalition convened a working group over the summer to take up the issue after a Washington Post investigation in June showed that debt collectors increasingly have been pursuing foreclosed homeowners for their remaining mortgage debt.

In many cases, homeowners were pursued years after they had lost their homes.

In Maryland, debt collectors have up to 12 years to take homeowners to court for outstanding mortgage debt after foreclosure. The process is known as a deficiency judgment. The proposed bill would reduce that time to 180 days.

“It smacks of debtors prison and indentured servitude,” said state Sen. Jamie B. Raskin (D-Montgomery), who plans to introduce legislation shortly after the legislature reconvenes Jan. 8. “People should not be indentured servants to the mortgage they used to hold.”

How long can mortgage debt be pursued?

The bill applies only to foreclosures that occur after its passage.

“We feel confident we can pass something to change it going forward,” said Marceline White, executive director of the Maryland coalition. “I think it will be a bigger battle to apply it retroactively.”

Raskin agreed.

“I don’t think we can make it retroactive for constitutional reasons,” he said. “At the very least, we venture into murky constitutional territory.”

At least a dozen states have statutes requiring that a deficiency judgment be brought within three months of a foreclosure sale. Illinois, Kansas and South Carolina require that deficiency judgments be sought at the time of foreclosure.

If approved, Maryland will go from being a state with one of the longest time frames for debt collectors to pursue consumers to one among the states with the shortest, according to Mark Kaufman, Maryland’s commissioner of financial regulation, who oversees debt collectors.

In the District, homeowners can be pursued for only 30 days, according to a report on the Federal Housing Finance Agency Web site. In Virginia, the limit is five years.

The coalition worked with Raskin and other legislators and about 25 state consumer advocates to research the issue and come up with language for the bill.

The draft language exempts homeowners from state law that allows up to 12 years for the filing of claims to recover debt. Commercial properties would still be subject to the longer time frame.

Foreclosures in Maryland have risen from 7,864 in 2012 to 14,675 last year, approaching levels not seen since the fallout from the housing crisis in 2009 and 2010, according to an analysis of data provided by RealtyTrac.

The bill would not provide relief to homeowners who went into foreclosure during the housing crisis and are facing a deficiency judgment. In addition, those who went into foreclosure during that period would still face the risk of having a debt collector take them to court.

The bill falls short of addressing the issue of compounding interest. When a property goes into foreclosure, the interest continues to accrue on the home. If debt collectors wait years to pursue a deficiency, that could add tens of thousands of dollars on top of what the homeowner owes. Many homeowners are unaware that interest is accruing after they have moved out, often at a rate equivalent to that of a monthly car note.

Advocates say the legislation could cause state bankruptcy filings to increase because people will be aware of their debt sooner.

“We certainly think that might be a consequence of the legislation,” White said. “We had a lot of heartfelt discussion about it. But most people felt it was better for people if they had to pursue bankruptcy to do it quickly so they could really spend time putting their lives back together and rebuilding their assets.”

Changing the law is a move in the right direction, said Cara Stretch, director of foreclosure prevention at the Baltimore-based St. Ambrose Housing Aid Center, who was among the housing advocates putting together the legislation.

These judgments have “banged up” homeowners’ credit and can prevent them from getting jobs or promotions, particularly if they are government workers with a security clearance because it shows up on their credit report.

“This could really harm people from improving employment,” Stretch said. “Some people have been able to negotiate settlements for lesser amounts and payment plans to cover the debt. But probably one of the biggest concerns is the impact to the homeowners’ credit.”

In June, lawyer Dmitri A. Chernov said he was able to fight his client’s judgment for more than $100,000. The case resulted in a settlement in which his client paid her debt collector a one-lump-sum cash payment of less than $10,000.

“We don’t want people to be haunted the rest of their lives by a mortgage foreclosure,” Raskin said. “We want to give people an incentive to get back on their feet, work hard and save money. We don’t want someone waiting in the wings to pounce on them for the deficiency five or 10 years down the road, when they’ve finally had a chance to get back on their feet.”

The Post reported that more than 400 people in Maryland faced such judgments and that mortgage giants Fannie Mae and Freddie Mac were pursuing thousands more nationwide.

One of those is Jose Faustino Rodas Mendez, who got his notice this year.

He thought he had gotten a 30-year fixed mortgage on the two-bedroom College Park home he bought in 2006. But the payments eventually shot up to $3,000.

Mendez, 38, cleans and maintains office buildings. His wife works at a restaurant. They support three children. To make ends meet, he constructed two bedrooms in his home and rented them out for $400 each.

But it still couldn’t cover the mortgage.

Mendez was foreclosed on in 2009, and Freddie Mac, which had guaranteed the mortgage, took the home. The agency paid Mendez $3,500 to get out.

A spokesman for Freddie Mac declined to comment on the case.

Mendez moved into a cramped apartment in Mount Rainier and has been trying to rebuild over the past three years. Last summer, he pre-qualified for a new mortgage.

That’s when the notice arrived saying a debt collector had taken him to court for nearly $200,000 in unpaid debt and interest — more than half the cost of his $380,000 foreclosed house.

Mendez talked to a housing counselor at the Central American Resource Center in the District.

“They told me that I was being sued and that they [the debt collector] could take money out of my paycheck,” Mendez said.

“My heart was thumping, going boom, boom, boom,” he said. “I thought, ‘How am I going to support my children and pay the rent and all that?’ ”

Mendez would not be protected under the current proposal.

Alexia Campbell and D’Ante Smith, who are attached to The Washington Post’s Investigative Unit through a program with American University, contributed to this report.

Kimbriell Kelly is a reporter on the Investigative Unit team The Washington Post.
Steven Rich is the database editor for investigations at The Washington Post. While at The Post, he’s worked on investigations involving tax liens, civil forfeiture, cartels and government oversight. He was also a member of the reporting team awarded the Pulitzer for NSA revelations. PGP Fingerprint: 69FA 5730 ADDD 5488 24FE 6EB2 B727 D930
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